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FRM Part II · FRM Exam Part II · The Rise and Risks of Private Credit

A regulator reviewing private credit funds with semi-liquid or open-ended structures offering quarterly redemptions is worried about financial stability. Which feature of such vehicles is the most important source of the concern?

The key concern is liquidity mismatch: illiquid, long-dated private loans are financed by investors who can redeem at short notice. In stress, redemption requests may force asset sales, gating, or markdowns, which can transmit strain to the wider financial system.

  1. AIlliquid, long-dated loans are funded by investors who can redeem on short notice, creating a liquidity mismatchCorrect
  2. BFloating-rate loans eliminate all interest rate risk for investors
  3. CDirect lending requires the use of public credit ratings for every borrower
  4. DFund managers are required to hold loans to maturity under securities law

Explanation

Open-ended or semi-liquid vehicles hold illiquid loans but promise periodic redemptions, so stress can trigger run-like redemption pressure and forced sales or gating. The other options are either false or are not the central stability concern.

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